| The relationship between the government and enterprises is an important issue in China’s economy.As an alternative mechanism of the market mechanism,political connection is gradually concerned by entrepreneurs,so it is more common for enterprises to establish political connection.This paper selects A-share listed companies in China from 2004 to 2018 as the research object to explore the relationship between the stock returns of politically connected firms and the future stock returns of similar,non-connected firms.The existing literature points out that the development of China’s stock market is not perfect.One of the characteristics of China’s stock market is the existence of "policy market".The existence of "policy market" has a significant impact on the stock price,the volatility of the stock market and the return of investors.In the process of continuous improvement and development of this market,investors will be aware of the impact of political changes on the stock market,and pay close attention to new political news and other political changes.Investors will choose to first analyze companies that they believe are better able to deal with these politically relevant information shocks.Therefore,based on the above theory,this paper assumes that investors can use the company’s politically connected background to measure the impact of political changes on the market,and timely update the stock price of politically connected companies.The impact of value related political information should be first reflected in the stock price of politically connected companies,and then delayed in the stock price of similar non-connected companies.In actual investment,investors should be able to predict the future stock returns of non-connected companies by observing the stock returns of similar,politically connected companies,so as to form a profitable investment strategy portfolio.In the empirical study of the predictability of earnings from political relations,this paper considers three different definition methods of corporate political connection:（1）The ultimate controller or chairman of an enterprise is a member of the National People’s Congress or the Chinese people’s Political Consultative Conference,or once worked in a government department.（2）The ultimate controller and the board of directors of the enterprise have more than two directors,who are members of the National People’s Congress,the Chinese people’s Political Consultative Conference or private enterprises who have worked in government departments.（3）State owned holding enterprises.Based on the research methods of other scholars,this paper tests the hypothesis of slow information diffusion.In order to solve the problem that it is difficult to determine a perfect match of similar non-connected companies for each company with political connections,this paper uses the portfolio as the test asset.The empirical results show that the stock returns of politically connected companies can predict the stock returns of similar non-connected companies.In addition,this paper proves that the short-term response of politically connected companies to the important political event of the two sessions is faster than that of similar non-connected companies.Through a series of Fama Macbeth tests,it is proved that the conclusion of this paper is still robust in cross-sectional regression.Finally,this paper uses vector autoregression to evaluate the possibility of reverse predictability,and confirms that the information flow is politically connected companies to non-connected companies,and uses placebo test to ensure that the results of this paper do involve the deferral of information through the channel of political connection.In a word,this paper proves that the three separate methods of determining political connections,whether single group or combined group,based on the deferred response of the price of similar non-connected companies to the price of politically connected companies,can be used to formulate profitable return predictability strategies. |
